The small, beginner forex trader often finds it difficult to trade profitably through inexperience, or using flaky commercial systems, but some forex brokers make it even harder by helping themselves to your money, often staying within the letter of the law. This posting is to highlight some of their nefarious tricks.
Beware The Bucket Shops
A bucket shop does not put orders into the interbank forex market. They simply rely on most traders losing, so take the opposite position to your trade, but only on their own systems. This means that it is in the broker’s interest for you to lose. As well as making money from the spread, they also get to keep your losing trades. In my experience, many brokers simply see beginning traders as people to take money off.
Since the trade is only on their systems, the bucket broker can distort the market, or widen spreads (the difference between the bid and offer price). I have seen situations where market news came out and the position went massively into credit, and then they deliberately widened the bid offer spread from 3 pips to 35 pips, and also prevented the trade from being closed.
One other trick is to deliberately hit stops. If you put the stop on their system, they can move the quoted price to trigger the stop, then it will immediately move to where it previously was. This is a way that they rob the small trader.
There is no real way to work around a dishonest or unscrupulous broker, especially if you trade news driven markets. All you can do is to read the experiences of other people and be careful when selecting a broker.
More Scam Information
The National Futures Association is the regulatory body that looks after forex brokers in the US. They maintain details of each broker and you can also check out any complaints filed against a broker.
There’s another site, Forex Bastards, which contains reviews of a number of brokers.